Business Context and Reporting Period
Company: First Commonwealth Financial Corp (FCFC)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: FCFC is a financial holding company headquartered in Indiana, Pennsylvania, operating primarily through its subsidiary, First Commonwealth Bank (FCB). The company provides consumer and commercial banking, trust, wealth management, and insurance services. As of December 31, 2010, FCB operated 115 community banking offices in western Pennsylvania and three loan production offices. The company focuses on organic growth and managing down large credit exposures.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Income (Loss) | $23.0 million | ($20.1 million) |
| Earnings Per Share (Diluted) | $0.25 | ($0.24) |
| Total Assets | $5.81 billion | $6.45 billion |
| Total Loans | $4.22 billion | $4.64 billion |
| Total Deposits | $4.62 billion | $4.54 billion |
| Shareholders' Equity | $750 million | $639 million |
| Return on Average Assets | 0.37% | (0.31%) |
| Return on Average Equity | 3.33% | (3.06%) |
| Net Interest Margin (FTE) | 3.88% | 3.71% |
| Allowance for Credit Losses | $71.2 million (1.69% of loans) | $81.6 million (1.76% of loans) |
| Nonperforming Loans | $117.5 million (2.79% of loans) | $148.6 million (3.20% of loans) |
Material Changes Versus Prior Period
- Profitability Turnaround: The company returned to profitability in 2010 with net income of $23.0 million, reversing a net loss of $20.1 million in 2009. This improvement was driven by a $39.0 million decrease in the provision for credit losses and a $27.0 million decrease in other-than-temporary impairment (OTTI) losses on securities.
- Balance Sheet Deleveraging: Total assets decreased by $633.5 million. Loans decreased by $418.4 million (9%) and investment securities decreased by $205.5 million (17%). This strategy reduced short-term borrowings by $771.1 million (80%) and long-term debt by $70.0 million.
- Capital Raise: In the third quarter of 2010, the company issued 18.5 million shares of common stock, raising net proceeds of $81.4 million to strengthen capital.
- Credit Quality: Nonperforming loans decreased by $31.1 million, and the allowance for credit losses decreased by $10.4 million, reflecting charge-offs of previously identified troubled credits.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management continues to focus on deleveraging the balance sheet, managing down large credit relationships, and adhering to stricter underwriting guidelines (geographic and size limits). The company expects to continue reducing exposure to loans exceeding internal limits.
- Regulatory Capital: As of December 31, 2010, the bank subsidiary was classified as "well-capitalized" under regulatory guidelines. The company is monitoring the implementation of Basel III capital requirements.
- Key Risks:
- Real Estate Exposure: Approximately 65% of the loan portfolio is secured by real estate. Further declines in real estate values could adversely affect earnings.
- Large Loan Concentration: The company holds 49 commercial loans with commitments greater than $15 million, totaling $1.2 billion. Default on these could have a significant impact.
- Investment Portfolio: Significant exposure to pooled trust preferred collateralized debt obligations with an aggregate book value of $78.8 million and an unrealized loss of $32.4 million. Additional OTTI charges remain a risk.
- Goodwill Impairment: Goodwill represents 3% of total assets. Changes in market conditions could trigger impairment charges.
- Unusual Items:
- OTTI Charges: Recorded $9.2 million in OTTI charges in 2010, primarily on trust preferred securities, compared to $36.2 million in 2009.
- Specific Charge-offs: Included a $34.2 million charge-off on a Florida condominium construction loan and a $15.4 million partial charge-off on a western Pennsylvania real estate developer loan.
Important Facts for Investor Verification
- Debt Covenants: The company is currently not meeting debt covenants on its ESOP loan and an unsecured $15.0 million line of credit related to nonperforming asset ratios and return on average assets. Management is working with lenders for waivers or modifications.
- Large Credit Exposure: Verify the status of the $44.1 million line of credit to a western Pennsylvania real estate developer, which had a $15.4 million partial charge-off in 2010 but remains a significant nonperforming asset.
- Investment Portfolio Valuation: Review the valuation methodology for pooled trust preferred collateralized debt obligations, which rely on discounted cash flow models and assumptions regarding future deferrals and defaults.
- Dividend Policy: Dividends were reduced to $0.06 per share in 2010 (from $0.18 in 2009) to preserve capital. Future dividend capacity depends on subsidiary earnings and regulatory capital levels.
- Regulatory Compliance: Confirm the company's continued "well-capitalized" status and its ability to meet evolving Basel III capital requirements without further capital raises.